If you're applying for a car loan and you're offered a 0% APR you may think you've died and gone to heaven, but some people are questioning if it's really that good of a deal.
If you're out looking to finance a new car and you decide that you're going to talk to the dealership about actually buying this car, chances are you won't be offered a zero percent interest rate. This isn't because they don't like you or the car you picked out, but it's because interest rates are based on your credit score. Only about 10% of people have a near perfect FICO score which is what is needed to qualify for 0% financing.
You not qualifying for this rate may not be a bad thing, however. Getting an extremely low interest rate like that can make the dealer less likely to negotiate the purchase price of the vehicle, basically leaving you to buy the car at the MSRP – much higher than you should settle for. The reason they won't come down on the price as much as they normally would is because most of the money they make when selling a car comes with the interest paid on the loan – if you have received a 0% interest rate then you won't be paying any extra money on the loan, meaning their profit plummets. Therefore, they will stick as close to the MSRP as possible to get a slightly higher profit.
Even if the dealer isn't willing to come down on the price a lot, you should always negotiate a little. If you've picked out a car that is $25,000 dollars and you finance it just for $1,000 less, you could save yourself $16 a month on your payment if you pay 0% interest. If you know that you're going to qualify for the low interest, your best bet is to try and negotiate the purchase price of the car before even talking about the interest rate.
Interest Rates and Loan Terms Play Against One Another
Okay, so we have already determined that a low interest rate – or no interest rate – can mean a higher financing amount for your new car, but did you know it can also mean a shorter loan term? Your low interest rate means you will have smaller monthly payments, and therefore, auto finance companies believe you will need less time to pay the loan off, and typically offer a maximum of four years (although, this is not always the case).
Let's use the example from above: if you are financing a vehicle for $25,000 with a 0% interest rate and your loan is for 4 years, your payment will be much higher at $552 as opposed to if you financed it for 5 years – the national average - at $441 a month. While the smaller interest rate will help lower your payments, the shorter loan term will raise your payment – it's a vicious cycle, really.
On the other hand, the only time that opting for a longer loan term will work to your advantage is when you pay 0% financing. Even if you qualify for a rate as low as 1.9% you should opt for a shorter loan term because you will pay less interest over the course of your loan and save yourself some money. If you are paying any interest rate for a longer loan term, even if it's just a year longer, this means twelve more payments with that 1.9% goes straight to the dealer. If you can financially manage the higher monthly payment with the shorter loan, you will be thanking yourself in the long run for not shelling out that extra cash the last year of your loan.
As We See It
Getting approved for a car loan at 0% is like a dream come true to some people, but to others it's just a burden because they are now subject to higher monthly payments due to their short loan term. If you have less than perfect credit and you don't qualify for these loans you may not be missing out on anything special. It's actually become the 'norm' to have subprime credit scores in recent years, and that is why more and more dealerships are offering bad credit car loans to their customers.
These customers may be paying a higher interest rate than the national average, but they are still able to drive away in a new car that is affordable and within their budget. Here at Auto Credit Express, we can help you find a dealership that offers special finance auto loans, and get you a loan with a loan term and interest rate that you can afford to pay each month. Get started today by filling out our online car loan application.